- Exercise retailer Lululemon is having an impressive 2019, outpacing competitors and the S&P 500.
- The company’s strength this year appears to be its weakness heading to today’s earnings report.
- Lululemon must print numbers that justify investor optimism and extreme valuations.
Exercise and yoga apparel company Lululemon (NASDAQ:LULU) will reveal its Q3 earnings today after the bell. Investors are already expecting a strong third quarter earnings report from the Vancouver-based sportswear retailer. While the stock has been on a tear this year, it needs more fuel to keep skyrocketing.
Industry leadership comes at a price, as Lululemon must continue to blow the minds of its investors. Anything less might open the company to massive profit-taking. That’s why I prepared two scenarios that can help investors capitalize Lululemon’s Q3 earnings play.
The Bullish Case: Convincing Earnings Beat
Wall Street is expecting Lululemon to print an earnings per share (EPS) of $0.93. The figure reflects 24% growth from the $0.75 posted in the same quarter last year. Analysts estimate net revenue of $896.5 million, a 19.91% increase from the same period last year.
Meeting expert expectations may not be enough to sustain the ascent of LULU. The company must convincingly take out those numbers to justify its current valuation. According to Forbes, the Whisper number for Lululemon is $0.98. That’s Wall Street’s unofficial take on the retailer’s earnings. Hit that number and LULU might go parabolic.
The good news is that the yoga apparel company looks fundamentally strong. It continues to expand internationally while diversifying its product line. Yahoo! reported that the company expects digital revenue to more than double while international sales to quadruple. The retailer is also making a strong push into menswear and self-care products.
The company’s future looks rosy, so it’s not surprising to hear that Credit Suisse is bullish.
Credit Suisse keeping an outperform rating on Lululemon. | Source: Twitter
The Short-Term Bearish Case: Weak Q3 Earnings Report
A hint of weakness may trigger a waterfall event for LULU. I say this because the company is trading at an astounding 48X forward price-earnings valuation. That number is well above industry average of 15X. In addition, the stock is trading at 6.9X its 12-month sales estimates, which is significantly higher than the industry average of 1.9X.
These figures reveal that the stock is extremely overvalued. Technical indicators agree with the fundamentals. The growth of LULU this year has sent the stock to extreme overbought territory. From the monthly time frame down to the daily, the security is flashing overheated signals.
Lululemon looks ripe for a pullback, | Source: TradingView
Investors must see that growth is far from its zenith. Otherwise, they might interpret the writings on the wall as a signal to sell. Once profit-taking starts, it might be difficult for the bulls to stem the tide.
Seeking Alpha reported that 729 portfolio managers with 107 million LULU shares are sellers on balance. It makes sense because these managers have virtually doubled their investments in the last 12 months. Any sign of weakness from the company and they might start selling on strength.
In the end, Lululemon looks bullish from a long-term perspective. If the stock retraces due to an earnings miss, long-term investors can take that opportunity to buy on dips. With international expansion on the horizon, a temporary setback would likely not end LULU’s ten-year bull run.
Industry leadership may come at a price but I’m sure it’s something that LULU executives are happy to pay.
Disclaimer: The above should not be considered trading advice from CCN.
This article was edited by Sam Bourgi.